January 19, 2012

New Year, New Blog – 2012

I started FreeRealEstateEducation.com in May, 2009.  Hurting from a complete financial collapse in 2008, I decided to share my real estate investment failure with the world.  But here’s the funny thing about failure – it doesn’t last long.  That is, of course, you have a short memory and are willing to work.

From July, 2009 to today I’ve flipped more than 60 houses.  I’m far from being on stable financial ground again but at least I’m paying the bills and saving a little for a rainy day.

That’s why writing here now just doesn’t feel right anymore.  I’ve turned the page.

I fix and flip houses in Phoenix, Arizona.  With this type of business there’s a never ending supply of material.  But I didn’t think the content would make a lot of sense on FreeRealEstateEducation.com.

So I started a new blog, FlippingPhoenixHouses.com.  You’ll find me there from now on.  Of course, I’ll still write about my failures.  My hope is they won’t be of the catastrophic variety.

Thanks for reading!

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October 28, 2011

People without Money Shouldn’t Own Houses

Those who can do.  Those who can’t teach.  So the saying goes.

Robert Lerman, a professor of economics at American University and senior fellow at the Urban Institute and Robert Cherry, a Brueklundian professor in the Department of Economics at Brooklyn College of the City University of New York just wrote “Moving Families Forward: Third-Way Policies that Work“ 

They also had an opinion piece featured on CNN today titled How the Government can Solve the Housing Crisis. Mr. Lerman and Mr. Cherry propose creating 1 million housing vouchers for those unable to qualify for traditional financing (i.e. broke).

Isn’t that what got us into this mess in the first place?

But these two academics reason that it’s different now.  Home prices are lower.  A $115,000 home is much cheaper to buy than rent.  That may be true.  But where are these buyers going to come up with the cash required to perform routine maintenance?  What about the insurance, taxes and home owner’s association dues?

Let’s say the homeowner loses their job and falls behind on the mortgage payment.  Without any skin in the game (down payment) the choice to walk away will be any easy one.

I read recently that we are becoming a nation of renters.  There is nothing wrong with that.  Just like there are people that aren’t cut out to be parents, or managers, or pilots, or scuba divers – there are plenty of people that have no business being homeowners.

The worst kind of candidate for homeownership is the broke kind.

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October 13, 2011

How Not to Spend Too Much (or too little) on Your Next Fix and Flip

It’s tough being me.

Each and every day I wake up and wonder – should I wear shorts and flip flops or jeans and dress shoes?  Then I have to decide if I’m going to work at my office or at a remote location (i.e. Starbucks).  By lunch time it’s do I eat the left over pot roast or splurge on the taco plate at Baja Fresh?  And when I get home do I relax with a beer or glass of red wine?

So many decisions.

I have a similar dilemma whenever I purchase a house to fix and flip.  Do I replace the existing 12” tile with 20”tile?  Should I get rid of the laminate counter tops and install granite?  Are black appliances okay or do I upgrade to stainless steel?

Most real estate investors I know struggle with knowing exactly how much, or how little, to spend on their rehab deals.  That’s because if the house isn’t fixed up enough, it won’t sell.  And if too many improvements are made the profit margins disappear.

So what’s the secret sauce?  How do you find a happy medium?  The answer is simple.  Well, sort of.

Start by finding the most recent pending or closed comp for your fix and flip deal.  Make sure it’s not a dumpy short sale or bank owned property.  Do your best to find a normal sale (i.e. not distressed).  Next, review the MLS listing and pictures for this comp.  Drive by the house too.  Go inside if possible (if it’s still a pending listing).  Make mental notes of what was, and wasn’t done, to the property.

If the intent is to sell your flip for the same price, or slightly higher than the last comp, then guess what?  You need to make identical improvements.  If the plan is to sell your flip for significantly higher than the last comp (a risky bet because your deal may not appraise) then additional upgrades will be necessary.

Last month, I bought a fix and flip in an upper middle class neighborhood of Phoenix from a bank for $340,000.  My Realtor, a very sharp guy named Bill Watson, brought the deal to me.  He has an identical listing on the next street over pending for $450,000.  So before I bought the REO we took a tour of this property (that’s his listing pictured above and to the right).

We decided that if I could remodel the $340,000 bank owned stinker for 30-40K and make it look like his $450,000 model-like home then money could be made.

At the time of this post I’m still remodeling the house.  The market will tell me if I under or over did the rehab.  There are a number of other factors that could affect the sales price too, like the time of year, landscaping, the earth’s gravitational pull, etc.

But at least I had a good idea where to start, and stop with the improvements.  That’s a good feeling.

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September 30, 2011

Dealing with the Real Estate “They-Sayers”

They say you can’t keep a good man down.  They also say the only sure thing is death and taxes, that if you can’t stand the heat stay out of the kitchen, two wrongs don’t make a right and diamonds are a girl’s best friend.

What I want to know is who the hell are “they”?  Because “they” sure say a lot of stupid things.

I’m heading down to Rocky Point, Mexico today for three days on the beach with family and friends.  A few very caring people I know are worried about us, and all the violence that is supposedly occurring south of the border.  “They” say tourists are getting shot in broad daylight.  “They” also say drug cartels are running rampant through the streets of this small fishing village three hours south of Phoenix.

Sounds scary.  It if were true.  I’ve been down to Rocky Point twice in the last 18 months and I feel safer there than I do driving through south central Phoenix.

But you don’t have to take my word for it.  Google “Rocky Point Mexico Violence 2011” and see if you can find one credible news organization that has reported any recent negative news.  There hasn’t been a single incident down there since August of 2009.  Now, Google “Phoenix Arizona Violence 2011” and see what pops up.

“They” also say a lot of dribble about the Phoenix housing market.  It’s a buyer’s market.  It’s a seller’s market.  It’s an investor’s market.  There are great deals to be found.  There aren’t any good deals.  Foreclosures are on the rise.  Foreclosures are decreasing.  And around and around it goes.

Rather than pay attention to the real estate “they-sayers” I prefer to trust my instincts, and listen to guys like Tom Ruff of Information Market and Mike Orr of Cromford Report.  Here’s what Mike had to say on September 15th:

“There have been several media stories making a big deal about increased foreclosure numbers in August. Outside Arizona, and especially in judicial foreclosure states, these may have had some significance. Inside Maricopa County, they seem to have no significance at all. The rise in completed foreclosures from July to August was small at 8% and less than the 15% increase in the number of days that the calendar gave the trustees to work. There was a noticeable rise in foreclosure notices issued by Recontrust, the company that handles the notices for Bank of America. However the notices for other trustees were at roughly the same level as July and substantially down from 2010. The underlying downward trend is reinforced by the month to date numbers for September. We are projecting about 4,500 new foreclosure notices during September, a drop of some 16% from August and about 2,850 trustee sales, a drop of about 21%. Part of the drop is because September has 9% fewer working days (21) than August (23). Nevertheless it still looks like the foreclosure tide is on its way out, and the inventory of bank owned homes continues to fall, as does the count of pending foreclosures.”

The lesson here is whenever you hear someone say “Well you know they say…” politely nod your head and change the subject.  Maybe you can talk about Mexico.  “They” say it’s beautiful down there this time of year.

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September 23, 2011

The Thing I Hate About what I Love to Do

I’m blessed.  Since the age of 16 I’ve always done what I love to do.  And have gotten paid to do it.  My first real job was at KYEL-TV in Yuma, Arizona.  I was hired as a chyron operator (a computer that generates the graphics you see on a local TV newscast).   It was redundant and mind numbing.  But I was working at a TV station while my friends flipped burgers or bagged groceries.

Before long I was promoted to a cameraman and tape editor.  Eventually I’d leave my hometown of Yuma and become the Chief Photojournalist at KPHO-TV, the CBS affiliate in Phoenix.  The job was a lot of fun.  I traveled to the 1994 Super Bowl in Miami, the 1997 Rose Bowl in Pasadena and the 2000 Republican National Convention in Philadelphia.

But there was one part of the job I really hated.  It was called the MOS.

MOS is a popular TV news acronym for “man on the street”.  If you watch much local news you’ve seen an MOS before.  It’s a montage of sound bites from random passers-by.  The interviewer will ask questions like “Are you concerned about the national deficit?” or “How do you feel about the economy?” or “Will you watch Simon Cowell’s new show?”

There was nothing worse than when a producer would ask me to shoot one of these awful features.  The MOS was so universally hated one of my colleagues redubbed them Triple As (AAA – ask any asshole.)

When I started my real estate investment business in 2002 I was really looking forward to not having to do anything I hated.  After all, I was in business for myself.  No one could ask me to do something I didn’t want to do.  I would only do what I loved – flipping houses.

I wasn’t at it long before I was introduced to another dreadful acronym – BINSR.  BINSR stands for Buyer’s Inspection Notice and Seller’s Response.

This three page form is used by the buyer of a home to notify the seller of the home what repairs they’d like done to the property prior to closing.  And since I’m a frequent seller of fix and flip homes I have to look at 2-5 of these notices every month.

Most of the time the buyer wants simple stuff fixed – a leaky faucet, a cracked roof tile or a noisy garage door.  But every now and then I’ll get a really picky buyer that wants every item on the inspection report repaired.

Last week, I got a BINSR from one of those buyers.  They asked for 27 minor repairs.  Good grief.  I had to remind my Realtor, and their agent, that this was not a brand new house.  I agreed to 12 of the repairs.  And once those repairs were done the buyer still wasn’t happy.  I just sent my contractor out there again today to replace three roof tiles that he repaired last week with FHA approved adhesive.  Evidentially, that wasn’t good enough for this extremely anal buyer.  He demanded they be replaced.

Ugh.  This is the thing I hate about what I love to do.  But because I want to get paid I’ll fix this stuff.  I’m at the buyer’s mercy.  Regardless, it’s still better than interviewing a-holes.

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September 17, 2011

TV Producers Love Real Estate Dysfunction in Phoenix

If you’re a singer or band performing at an Indian casino it means one of two things:  your career is either on its way up or on its way down.  Think about that for a minute.  How many performers at their peak do you know of playing at the Harrah’s Ak Chin Casino in Maricopa, Arizona?  You won’t see Lady Gaga on stage there.  But you could probably get a ticket to Three Dog Night.

The same is true with reality TV shows.  Their producers seek out rising stars or washed up B-list actors and put them in awkward situations.  Because let’s be honest, dysfunctional people and processes make for great television.

So it came as no great shock to me when I read in yesterday’s Arizona Republic that a new reality show about Maricopa County trustee’s sales would begin taping in a few weeks.  Is there anything more dysfunctional than the Phoenix real estate market right now?

The show, called “Betting the House”, stars three of the top players down at the courthouse steps.  AZBidder.com, the company I use to bid on properties, declined to be involved in the project.  Owner Dan Mayes said “The characters and stories typically involved in reality shows like these are mostly dramatic, goofy or get-rich-quick in nature.  Our customers are pretty straight-laced folks.”

I agree.  And not much good can come from this kind of exposure.  The spotlight (Discovery Channel is airing the show) will shine bright and that’s not necessarily a good thing.  What is already a chaotic, and mostly unregulated process, will become more so with TV cameras rolling.

Besides, much of the so-called foreclosure crisis, at least here in Arizona, is behind us.  In his September 15th market summary Mike Orr of Cromford Report said “We are projecting about 4,500 new foreclosure notices during September, a drop of some 16% from August and about 2,850 trustee sales, a drop of about 21%. Part of the drop is because September has 9% fewer working days (21) than August (23). Nevertheless it still looks like the foreclosure tide is on its way out, and the inventory of bank owned homes continues to fall, as does the count of pending foreclosures.”

Regardless, I’ll be tuning in for every episode.  What can I say?  I’m a sucker for good TV.

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September 2, 2011

Breaking News: It’s Hot Here in Phoenix

Today’s forecasted high temperature is 111 degrees.  The Arizona Diamondbacks, our beloved baseball team, are on a 9 game winning streak and currently hold a 6 game lead in the National League West division.

There are just 19,241 active listings on the Arizona Regional Multiple Listing Service.  Foreclosures are down more than 30% from this time last year.  And I haven’t won a bid at a trustee’s sale since May 25th.  Every bank owned house I write a contract on has multiple offers.

I have one fix and flip in escrow and zero active listings or rehabs.  I can buy 10-12 properties right now but haven’t found a profitable deal since July 6th.

That’s right – everything here in Phoenix is hot, hot, hot.  Literally and figuratively.

So rather than sit around and fry I decided to do what almost every Arizonan does on Labor Day Weekend – go to San Diego.  To quote my favorite country group, the Zac Brown Band, “I got my toes in the water, ass in the sand, not a worry in the world a cold beer in my hand, life is good today.”

See you next week.

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August 29, 2011

From TV Cameraman to Private Equity Fund Manager

Mark Meyerdirk, Linda Boardman, Loral Langemeier, Marty Boardman, Bob Proctor

Have you ever thought about creating a private equity fund?  Attorney Mark Meyerdirk sat a across from me at a glossy conference room table in Lake Tahoe, Nevada.  He was flipping through my company financials as I explained the business model.

It was springtime, 2006.  The snow was just beginning to melt outside the Hyatt Resort at Incline Village.  I sat in between Mark and personal development coach Bob Proctor.

The objective that day was to determine a purpose, vision and goal for my real estate investment business.  Mark would provide the legal advice and Bob would get my mind right.

Mark observed that much of the cash my company had on hand came from private money loans and lines of credit with interest rates up to 20%.  He recommended I start a private equity fund.  Instead of incurring more debt to acquire distressed real estate the cash would come from accredited investors.

The idea made a lot of sense to me.  I would soon fall in love with the thought of being a private equity fund manager.

I’d certainly come a long way from my days of working as a news cameraman for the CBS affiliate here in Phoenix.  I traded 100 lbs. of camera gear and sweltering Arizona heat for Excel spreadsheets and an air conditioned corner office.

Then 2007 happened.  The real estate market crashed and the private equity fund never got beyond the initial planning stage.

The next two years were a struggle.  My wife went back to work and I went back to the drawing board.  But even as we depleted our savings account I was convinced that an opportunity would eventually surface and the private equity fund would become a reality.

By the spring of 2009 things were looking bleak.  We’d run out of cash and my wife’s salary wasn’t covering all the bills.  So I reached out to my church pastor for some advice.  He introduced to me a local real estate investor.  And as fate would have it this real estate investor had work for me to do – as a project manager and Realtor for houses he purchased at Maricopa County trustee’s sales.

Within a year I was back on my feet again and doing what I loved.  I had re-learned the fix and flip business and was ready to do it again on my own.  So last fall I emailed Mark Meyerdirk and we started talking about the private equity fund again.

Through a series of Skype calls and emails we started work on a private placement memorandum and pro forma financial model.  We wrote drafts and revisions and drafts and more revisions.  Documents were filed with the state of Arizona and the Securities and Exchange Commission.  It was a huge effort.  But this process forced me to really break down the business.

Now, after more than 8 months of planning and preparation the hard work is done.  I’m proud to say that on this day, August 29th, 2011, I’m a private equity fund manager.  The fund has been created and will acquire of $2,000,000 in distressed Arizona real estate over the next 90 days.

I’m grateful to Bob Proctor for all of his coaching.  I’m grateful for the patience, advice and support from my attorney Mark Meyerdirk.  And I’m grateful I don’t have to go back to lugging around camera gear in the hot Arizona sun.  Did I mention its 116 degrees outside today?

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August 26, 2011

‘As-Is’ Home Sale Doesn’t Always Mean ‘As-Is’

Last night I asked my 8-year old daughter to go upstairs and get ready for bed.  Her regular bed time is 8:30p.  By 8:40p she still hadn’t moved from her seat at the kitchen island.  Evidentially she found the letter she was writing to her cousin more important than brushing her teeth.

So I asked her to get upstairs and get ready for bed again.  And again at 8:45p.  At 8:50p, again.  By 9p, I had to put my foot down.  I got off the couch, paused the movie I was watching, and escorted her up to bed.

I guess asking my daughter to ‘get ready to go to bed’ doesn’t always mean ‘get ready to go to bed’.

Negotiating with a retail home buyer is a lot like dealing with my daughter.  I’m in the process of closing the sale of a fix and flip property I acquired last month.  The buyer agreed to purchase the home ‘as-is’.  Now I don’t know about you, but to me ‘as-is’ means ‘as-is’.  No matter what the buyer and her inspector find wrong with the house –  they agreed, in writing, to accept it in that condition.

But of course, this doesn’t prevent the buyer from asking me to fix things she finds wrong with the house anyway.  Nor does it stop her FHA lender from requiring certain items be fixed, per the loan underwriter.  Here’s what I found out had to be repaired, just two days prior to closing:

  • Toilet won’t flush properly
  • Garage door missing sensors
  • Roof certification required for all roof repairs
  • Cracked window

So guess who is expected to make these repairs?  The buyer’s agent called my Realtor and asked us to take care of these items.  I had to remind my agent that they agreed to purchase this home ‘as-is’.  If the buyer wants this stuff fixed she’d need to call her own repairman and pay for it herself.

And that’s exactly what the buyer did because she really wanted the house.

As the seller I ordinarily would agree to repair any minor problems with a house.  However, I make an exception with FHA buyers.  That’s because FHA appraisers and underwriters are very particular.  I flipped a house to an FHA buyer in March and my contractor had to go back to the house 5 times to appease the picky inspector.  I can’t deal with that – too frustrating.

So if you’re selling a house to a buyer ‘as-is’ just remember the buyer may not take you literally.  Get used to it.  I have – in my fix and flip business and at home with my daughter.

 

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August 19, 2011

Games Realtors Play with their REO Listings

It was bad.  Not the worst I’ve seen, but bad.  Walls were ripped open – copper pipe cut away from the kitchen, laundry room and bathrooms.  Holes in the ceiling gave the thief easy access to the air handler.  Of course, the A/C unit was gone, along with the hot water heater and ceiling fans.  Attic insulation littered the floor like dirty snow on a busy city street.

The house is what you’d call an “investor special”.  However, you’d never know it by reading the MLS Plano (that’s fancy way of saying the information sheet you get from a Realtor).

The public remarks section read:

Three bedroom house with two baths and three car garage. Covered patio in the back yard makes a great retreat. Spacious floorplan. This bank owned property is sold AS-IS with no SPDS or CLUE report. Bank of America pre- approval must be submitted with all offers.

Sounds nice right?  Amazing it’s still on the market after 62 days.  The list price was $70,800.  In good condition could easily resell for $100,000.  So I called the Realtor prior to driving 40 miles from my office in Gilbert to Avondale to see the property.  No offers he said.

I should have known I was dealing with a knuckle-head when I got to the house.  It had 4 bedrooms, not 3.  That’s kind of a big deal.  And there was no way this skeleton of a home would ever qualify for traditional bank financing through Bank of America.  Only a cash buyer could touch this deal.

That’s two strikes against the Realtor.

Still, for the right price this was a money maker.  I called the Realtor again yesterday at 5:17p.   Any offers I asked?  No offers he said.  My contract went out to him 20 minutes later – $48,000 closing in two weeks.  A little low I’ll admit but this house could easily need $25,000 in repairs.  Cooper is expensive.  And difficult to install when it’s been ripped out of the walls.

This morning at 10:30a I get a call from his “assistant”.  Apparently the big shot was too important to call me directly.  Have you been to the property she asked?  Yes, I have.  She goes on to explain that they now have 5 offers on the house.  She wanted to know if this offer was my “highest and best”.

Really?  That’s funny I said.  After 62 days on the market 5 offers come in less than 17 hours?  Unbelievable.

She told me that I didn’t understand the market.  That’s strike three.

Mr. Realtor, don’t piss down my back and tell me it’s raining.  Your extremely poor attempt to create an artificial bidding war may work on some poor unsuspecting retail buyer’s agent but it won’t work on me.

If you really do have 5 offers then fine.  But you must have known when I called you yesterday that other offers were on the way.  Show some professional courtesy and let me know.  With this information I would have elected not to inspect the house, or write an offer.  I want to be the seller’s ONLY option.

Realtors like you hurt the market.  Poorly written, ambiguous listings and sloppy customer service will come back to haunt you.  The banks will eventually run out of REO listings.  Your phone will stop ringing.  The money will stop coming in.  And just like that – GAME OVER.

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